A life assurance policy can help you protect your mortgage and provide cover to help repay the loan. There are different types of life assurance, and which one suits you will depend on your circumstances and needs. A financial adviser can help you understand the different types of life assurance policies and which one is likely to suit you personally. Here is an overview of the three types of life assurance available to protect pensioner mortgages.
Term Assurance (LTA) provides life insurance which is payable on either death or terminal illness. This type of insurance lasts over a fixed term and can also be set up to include other illnesses including critical illness as well as permanent health insurance cover. However, these options are likely to expire at normal retirement age and may therefore not be available well into retirement.
The premiums on a Term Assurance can either be fixed or flexible, which means they can remain the same throughout the term or increase depending on claims history. There is no element of saving in the insurance policy as once the policy is over, you do not receive anything back. i.e. there is NO investment element. A drawback of such a policy with lifetime mortgages is that while the policy is fixed term, the lifetime mortgage continues until you die. Therefore, a gap in life cover will exist at some point in the future. Level term assurance works best with an interest only fixed term mortgage, wherein the balance remains the same, as the policy can be set up on similar terms.
Mortgage Protection (MP), or Reducing Term Assurance also provides cover on death and terminal illness. Like a Term Assurance it too lasts for a fixed term. However, unlike the Term Assurance, it provides a reducing amount of cover. Like a Term Assurance cover, the premiums can be fixed or flexible, there is no surrender value and there are no savings to be made on this type of cover. These premiums are cheaper than a level term assurance policy for the same initial sum assured.
This type of assurance works best with capital and repayment mortgages, where the balance goes on reducing over time. If set up with the correct sum assured, this will guarantee to pay off the mortgage. As the cover reduces over time, it cannot be used effectively with an interest only lifetime mortgage, as the balance on the mortgage remains the same. Also, the mortgage continues throughout life, but the assurance is fixed term.
The third type of life assurance is called Whole of Life (WOL) which provides cover which is payable on eventual death. This policy provides life assurance over the rest of one’s life and a predetermined sum is paid out at the end of the plan ter. The cover remains level, but sometimes companies may offer an escalating option. Like the other options, the premiums can be guaranteed or flexible. Unlike the other options, the assurance has the option of having a savings element, usually linked to the stock market or a with-profits fund.
Depending on the performance of the investment, there could be a surrender value in the future. However, this is also a more risky proposition, as if the investment does not do so well, there may be an increase in the premiums: not something that works the other way around if the investment does well!
Whole of life plans are designed to last longer than the LTA and MP, and is therefore more costly, but for the same premium the cover in this assurance is not as high as the other two. As it is a lifetime assurance, it is commonly used to meet funeral expenses. This type of assurance is not ideal for a high borrowing mortgage due to the expense of the cover, but works very well with an interest only lifetime mortgage.